Even as foreclosure activity slows across the nation, bank repossessions continue to grow, reaching a new record high in May that's 44% above the rate a year earlier, according to RealtyTrac.
But despite the huge year-over-year growth in repossessions, overall foreclosure activity actually fell 3% from the previous month as 322,920 households received a foreclosure filing, an increase of less than 1% from May 2009.
"The numbers in May continued and confirmed the trends we noticed in April: overall foreclosure activity leveling off while lenders work through the backlog of distressed properties that have built up over the past 20 months,” said James Saccacio, chief executive of RealtyTrac. "Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed."
Indeed, RealtyTrac even points out that the number of homes taken back by banks in May increased year-over-year in all 50 states, even as the number of homes scheduled for foreclosure auction fell 4% from the previous month to 132,681, and the number of households that received a default notice fell 7% to 96,462 -- the lowest number since November 2008 and down 32% from the peak of 142,064 default notices in April 2009.
The states with the highest rates of foreclosure activity continued to be Nevada, Arizona and Florida, with Nevada in the lead despite a nearly 12% decrease in foreclosure activity from the previous month and a 16% decrease from the year earlier. In May, one in every 79 housing units in Nevada received a foreclosure filing, putting its rate at five times the national average.
In Arizona, the state with the second-highest rate of foreclosures, one in every 169 properties received a foreclosure filing, an increase of less than 1% from the previous month but a decrease of nearly 5 percent from May 2009.
Florida was hit with the third-highest rate of foreclosures, with one in every 174 properties receiving a foreclosure notice, an increase of nearly 5% from April and a decrease of 14% from May 2009.
The fourth-worst rate went to California, where one in every 186 properties received a foreclosure notice in May, up 3% from April and down 22% from the year earlier. Meanwhile, Michigan's 46% increase in foreclosure filings from May 2009, as well as its 6% increase from April, pushed it into the fifth spot.
But California, with 72,030 households receiving a foreclosures filing in May, still was the state with the most activity. Of the 10 states whose foreclosure activity made up 70% of the national total, California had 22%.
With the second-highest number of foreclosure filings, Florida's 50,685 made up nearly 16% of the national total in May, while Michigan made up 6% of the total with 20,322 properties. Arizona and Illinois each accounted for nearly 5%, with 16,097 properties in Arizona and 15,061 in Illinois.
The remaining states in the top 10 were Nevada with 14,346 foreclosure filings, Georgia with 13,778, Texas with 11,137, Ohio with 10,379 and New Jersey with 7,993.
Not to end on a negative note, but lastly, these states posted significant increases in year-over-year foreclosure activity: 65% in Maryland, 37% in Illinois and 31% in Georgia.
Is it really the beginning of the end of foreclosures? Egad, it's going to be a long, painful haul.
Foreclosures reached a high in February 2010, the last month data were available, when 4,169 high-end homes were somewhere in the foreclosure process; having received a foreclosure notice, had an auction scheduled or had ownership taken over by the lender. That's a 121% increase from a year ago.
Where are mortgage interest rates heading? Is now the time to buy? MoneyWatch experts answer these questions and more.
Heated pools, ocean views and media rooms are not what most people would expect to find in a foreclosed property, but more high-end homes—priced over a million dollars—have been falling into the hands of banks this year.
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This foreclosed home in Fort Mill, S.C. is currently listed at $1.148 million. |
Foreclosures of homes worth over $1 million began increasing at the end of 2009, according to exclusive data provided by foreclosure tracking website RealtyTrac. Foreclosures reached a high in February 2010, the last month data is available, when 4,169 homes were somewhere in the foreclosure process; either having received a foreclosure notice, had an auction scheduled or the lender took ownership of the property. That’s a 121 percent increase from a year ago.
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This five-bedroom, beachfront home in Captiva, Fla. is now bank owned and on the market for $3.65 million. |
“Lenders are far more likely to go the short sale route," says Andrew LePage, an analyst at real estate research firm DataQuick. "There’s a lot more money at stake, and maintenance can be high if a foreclosure just sits there.”
In March 2009, the Obama administration announced what it described as a $75 billion plan to end the foreclosure crisis by keeping defaulting owners in their homes. But in its first year it ended up helping only about 200,000 of the 7 million households that are behind on their mortgages and risk foreclosure. In March 2010, the administration said that it would significantly expand the program. The goals of the new effort were to refinance several million homeowners fresh government-backed mortgages with lower payments; to temporarily reduce the payments of borrowers who are unemployed and seeking a job; and to encourage lenders to write down the value of loans held by borrowers in modification programs.
The biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.
About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak.
The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble.
Additionally, the administration has decided that beginning on April 5, it will paying some underwater homeowners to leave their homes, in a program that will allow them to sell for less than they owe and give them a little cash to speed them on their way.
The program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.
Industry insiders said a major impediment to the plan was that it relied on using subsidies to entice mortgage servicing companies to modify mortgages. The administration's incentives, the experts say, are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure. And some housing advocates said the leverage the administration needs to get large-scale action was left on the shelf by Congress, when the Senate in May rejected a plan to allow bankruptcy judges to modify mortgages, the so-called cramdown provision.
When the initial plan was announced, it appeared bolder -- and more expensive -- than any of the Bush administration's programs, which were based almost entirely on coaxing lenders to voluntarily modify loans. But it was hindered by the often arms'-length relationship between investors and properties, when the original mortgages had been bundled into securities.
Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.
Thanks and Enjoy,
Brenda~
Let’s get one thing out of the way: If you think that shopping foreclosure auctions is your ticket to a once-in-a-lifetime deal on a dream house, it’s time to lower your expectations. Fully 45 percent of April’s housing sales were foreclosed properties, and 33 percent of May’s, so you’ll have a lot of company at the fire sale. It’s tough to be “below market” when you are such a big chunk of the market.
If anything, it’s the other way around: Foreclosures are creating opportunities by dragging down the prices of traditional sales.
That said, a motivated seller is a buyer’s best friend, and no seller is more motivated than a lender with a ton of properties to unload. Here are four things you need to know before jumping in to oblige.
1. Don’t Speculate
- If you’re looking to buy and flip, think carefully. The one thing economists agree on is that home prices are going to continue to fall and inventory will continue to rise in the near term, so you may wind up underwater. And no one predicts a major turnaround in prices for some years. So depending on the local market (Florida, for example, or Phoenix), even a 20 percent savings in the purchase price may not be enough to cover future declines.
2. Focus on REOs
- There are two kinds of auctions: Foreclosures and REOs (Real Estate Owned properties). The latter are houses that fail to sell in a foreclosure auction and become the property of the lender or trustee.
In a foreclosure sale, the minimum bid is the loan balance on the property plus all accrued interest, any expenses associated with the foreclosure process (including attorney fees), and any back taxes or liens, all of which could add up to more than the market value. You have to take the house “as is, where is,” so if the previous owner or his tenants still reside there, for example, it becomes your responsibility to evict them.
On the other hand, because banks are eager to rid their balance sheets of real estate, they are often willing to heavily discount the price of REOs and cover all outstanding liens. In some cases, there is no reserve price at all and the property will go for the highest bid, regardless of the lender’s investment in it.
3. Get a Check
- Long before the bidding starts, check the auction company’s particular requirements online. For example, you likely will need a government-issued ID and a cashier’s check for $5,000 to $10,000 to use as a down payment on your deposit, which is usually 5 percent or 10 percent of the purchase price. You can usually pay the difference between your cashier’s check and the deposit with a personal check. In most cases, you can change your mind after making the deposit, but the time frame varies. Plus, you may have to close within a very tight window — too tight to get financing — so you might need cash for the total purchase price.
4. Don’t Feel Guilty
You are not a greedy vulture for benefiting from someone else’s misfortune. These sales are an important factor in stabilizing the market. The faster the foreclosed inventory is eaten up, the faster the real estate market will improve.Banks and homeowners alike need to take a more realistic view about how to stem the tide of foreclosures overtaking the housing market and the economy, the head of a government watchdog panel told CNBC.
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Congressional Oversight Panel Chairwoman Elizabeth Warren |
1. Not Understanding the New Rules
- What’s changed in real estate? The details. While you still go out and shop for a home, make an offer, find financing and close on the property, the details of how this process works today are vastly different from the way we went about buying real estate five, 10, or 20 years ago.
If you attempt to wade in without familiarizing yourself with the new way of doing business, you’ll find yourself blocked at almost every turn. Finding good partners (see below) can help, but you have to be prepared to provide more information and evaluate more factors in order to close successfully on a new home.
2. Failing to Build a Top Real Estate Team
- If you buy and sell property for a living, you know that it’s a team sport. Even if you’re a real estate agent, you’ll still need a good lender, inspector, title or escrow company, and attorney to assist you in completing this purchase successfully.
But some buyers think they can do it on their own. In today’s new real estate world, that’s a mistake. For example, even in states where real estate attorneys aren’t generally used to close house deals, using an attorney to help you negotiate a foreclosure or short-sale purchase can mean the difference between closing and sitting in limbo. Real estate agents who intimately know the foreclosure market or have colleagues who represent real estate owned properties for banks and other financial institutions can help you find the right property faster. Get on their short list as an investor with cash to spend and they’ll give you extra time and attention.
Taking the time to build a great real estate team will pay off in spades. Not putting this team together ahead of time is a mistake you don’t want to make.
3. Not Responding to Your Lender’s Requests
- Lenders have tightened up credit requirements and are taking the time to verify every piece of information you submit. In fact, when you apply for a mortgage today, you should expect to provide reams of documentation both with your application and during the verification process.
It’s quite likely that some of your information will disappear during the process, and you’ll be asked to replace various documents or augment your documentation. When these requests come in, you should take them seriously and respond quickly. If you don’t, you could be putting your financing in jeopardy.
4. Not Cleaning Up Your Credit in Advance
- One of the ways lenders are tightening credit requirements is by raising the minimum credit score necessary to be approved for a mortgage. Prior to the credit crisis, lenders might have charged one interest rate if you had a 680 credit score — today you might need a credit score of 720 to get the same rate. When it comes to government-backed loans, FHA originally didn’t have a minimum acceptable credit score limit, but it has now instituted tougher standards that require a credit score floor of at least 600 in order to get a loan.
That’s why is extremely important that you spend time cleaning up your credit history and score before you apply for a loan.
5. Paying Too Much
- Although home buyers are enjoying the strongest buyers’ market in recent memory, some buyers are paying more than they should for properties. Why? There seems to be a fear growing in some areas of the country that if you don’t buy now, you’ll miss out on a once-in-a-lifetime opportunity to “get in at the bottom.”
While it’s true that in some markets, “bottom feeders” are coming in and swooping up properties by the dozen, fear is the wrong emotion to drive the real estate market. The housing bubble formed because too many folks were thinking about real estate as an investment and not about the other parts of the equation. They were afraid to wait, believing that property prices would go up at 8 to 10 percent per year.
We now know that property prices can tank as well as soar. The trick is to understand what the real value is in a neighborhood and not overpay for property. Don’t be pressured into making a move before you’re ready.
6. Believing What You Read and See on the Internet
- Scam artists love the Internet, and there will always someone trying to scam you in some way, shape, or form. And when it comes to real estate, it’s even easier to get ensnared in someone’s web. But even if you don’t get scammed, it’s easy to get fooled by what you read or see on the Internet. If you shop for a home only on the Internet, and never go to see the property in person, you might be surprised to find that the house looks different, or the neighborhood is not as it was represented. Perhaps the property backs up to a dump or the train tracks that you didn’t notice when you did your Google search.
The smartest thing you can do is take everything you see on the Internet with a grain of salt — and then take the time to see the property in person.
7. Not Understanding the Risks with a Desperate Seller
- The housing crisis has produced millions of foreclosures. But it has also spawned millions of homeowners who are “underwater” with their mortgages — that is, who owe more than their homes are worth — and are offering them for sale for less than the mortgage amount. There are some risks involved when you buy a home through one of these so-called “short sales”: The property might have years of deferred maintenance (because if you can’t afford your mortgage, you probably can’t afford to maintain your home either); there may be hidden liens lurking that will cause problems after the closing; and you may have to negotiate with several lenders, which could take months.
If you’re hoping for a big bargain from an underwater seller, you’ll need to be patient. And above all, you’ll need to realize that even if you’ve spent months negotiating a deal, it could fall apart overnight — and you’ll have to start all over again.
8. Forgetting to Buy Owner’s Title Insurance
- When you purchase property, your lender will require you to buy a lender’s title insurance policy. But unless you also purchase an owner’s title insurance policy, only the lender will be made whole financially if something goes wrong. And there are so many things that can go wrong when it comes to title. Not only can a former owner pop out of the woodwork, but mechanics’ and tax liens can “magically” appear — especially if you’re buying a short sale. (See above.)
Don’t risk it. Order an owner’s title insurance policy when you order the lender’s policy. If you’re buying with cash, don’t forget to order your owner’s policy well in advance of the closing date.
9. Not Considering a HUD Home
At a “How to Profit from Foreclosures” event I held in Atlanta in October 2009, I learned that there were more than 4,000 HUD homes for sale. (A HUD home is simply a foreclosure that had FHA financing.) I learned that there are clever ways of searching for an agent who is more than just HUD-certified, but who really knows how to put in an offer on a HUD home. (You must have a HUD-certified agent put in your offers for HUD homes.) I learned that home buyers who plan to live in the house have a two-week advantage over real estate investors. And I learned that with FHA financing about 20 to 25 percent of all homes purchased, there will be plenty of HUD homes for sale over the next few years. There are thousands of HUD homes for sale across the country, in most neighborhoods. If you’re not thinking about buying HUD homes, you should.Excerpt from Buy, Close, Move In! reprinted courtesy of Harper Paperbacks.
There is a lot of interest in buying bank owned properties these days. A lot of information, some good and some bad, is floating around about the subject. Often the information offered is for sale, with the promise that you can make a lot of money with little effort once you know “the secret formula”. The fact is that there are no secrets, and to make money does require effort.
What’s an REO?
REO stands for “Real Estate Owned”. These are properties that have gone through foreclosure and are now owned by the bank or mortgage company. This is not the same as a property up for foreclosure auction. When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accumulated during the foreclosure process. You must also be prepared to pay with cash in hand. And on top of all that, you’ll receive the property 100% “as is”. That could include existing liens and even current occupants that need to be evicted. A REO, by contrast, is a much “cleaner” and attractive transaction. The REO property did not find a buyer during foreclosure auction. The bank now owns it. The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing. Do be aware that REO’s may be exempt from normal disclosure requirements. In California, for example, banks are exempt from giving a Transfer Disclosure Statement, a document that normally requires sellers to tell you about any defects they are aware of.
It’s commonly assumed that any REO must be a bargain and an opportunity for easy money. This simply isn’t true. You have to be very careful about buying a REO if your intent is to make money off of it. While it’s true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it. When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale. The bargains with money making potential exist, and many people do very well buying foreclosures. But there are also many REO’s that are not good buys and not likely to turn a profit.
Ready to make an offer?
Most banks have a REO department that you’ll work with in buying a REO property from them. Typically the REO department will use a listing agent to get their REO properties listed on the local MLS. Before making your offer, you’ll want to contact either the listing agent or REO department at the bank and find out as much as you can about what they know about the condition of the property and what their process is for receiving offers. Since banks almost always sell REO properties “as is”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it. As with making any offer on real estate, you’ll make your offer more attractive if you can include documentation of your ability to pay, such as a pre-approval letter from a lender. After you’ve made your offer, you can expect the bank to make a counter offer. Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer. Realize, you’ll be dealing with a process that probably involves multiple people at the bank, and they don’t work evenings or weekends. It’s not unusual for the process of offers and counter offers to take days or even weeks.
WASHINGTON (Reuters) – A recently created FBI team is setting priorities on mortgage fraud investigations, and the bureau is using undercover operations, wiretaps and computer technology to get evidence of economic crimes, the agency's chief said on Wednesday.
FBI Director Robert Mueller told a House Judiciary Committee hearing that the agency in December created the National Mortgage Fraud Team at headquarters to assist field offices in their pending investigations.
In his prepared remarks submitted to the committee and in his actual comments, Mueller said the team also is helping to identify the worst mortgage fraud perpetrators and to evaluate where additional FBI employees are needed.
The FBI's mortgage fraud caseload has tripled in the past three years to more than 2,400 cases, Mueller said.
In addition, the FBI has more than 560 open corporate fraud investigations, including matters directly related to the current financial crisis, he said. The FBI has declined to identify any companies under criminal investigation.
Mueller said the FBI has found new ways to detect and combat mortgage fraud.
One example involved a national FBI initiative that uses statistical correlations and advanced computer technology to search for companies and individuals with patterns of property flipping, he said.
"In addition, sophisticated investigative techniques, such as undercover operations and wiretaps, not only result in the collection of valuable evidence, they provide an opportunity to apprehend criminals in the commission of their crimes, thus reducing loss to individuals and financial institutions," he said.
Mueller said he met last week with Mary Schapiro, the head of the U.S. Securities and Exchange Commission, so that the two agencies could better coordinate investigations.
The two agencies have been investigating allegations of financial statement manipulation, accounting fraud and insider trading that contributed to the current economic crisis.
ATLANTA – Federal Reserve Chairman Ben Bernanke said Tuesday there's been "tentative signs" that the recession may be easing. But he also warned that any hope for a lasting recovery hinges on the government's success in stabilizing shaky financial markets and getting credit to flow more freely again.
Specifically, the Fed chief mentioned improvements in recent data on home and auto sales, home building and consumer spending as flickering signs of encouragement.
"Recently we have seen tentative signs that the sharp decline in economic activity may be slowing," Bernanke said during a speech at Morehouse College in Atlanta.
"A leveling out of economic activity is the first step toward recovery. To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets," he said.
But the Fed is "making progress on that front as well," Bernanke said, and will keep working to ease financial and credit stresses so those markets operate normally.
In a question-and-answer session after the speech, Bernanke acknowledged that the job market for graduates is the most difficult in decades. But he said the country still needs smart and hardworking people, especially in the business community, and urged students not to make financial compensation the main factor in what profession they choose.
"People ought to go into a profession based on what they enjoy, what is valuable to them, what they think is valuable to their society," Bernanke said.
Referring to the current economic crisis, Bernanke said "it is clear that some of the compensation and some of the risk-taking was excessive" in the financial community. There will be a more vigilant regulatory environment going forward, he added.
Bernanke also addressed the inequities in wealth between whites and minorities.
"Part of it has to do I think with financial education," Bernanke told students at the historically black college. "There needs to be broader understanding in minority communities ... about the importance of saving and building a credit record."
Bernanke said many factors contribute to the issue — including access to home ownership, income levels and differences in professions — but promoting financial literacy in minority communities is important.
To revive the economy, the Fed has cut a key bank lending rate to a record low of near zero and has rolled out a number of radical programs to spur lending to Americans, a key ingredient to turning around the economy.
On that front, the Fed recently plowed $1.2 trillion into the economy in an attempt to reduce interest rates for mortgages and other loans. The Fed, meanwhile, also is considering expanding a program to jump-start consumer lending, Bernanke said.
Many analysts believe the economy will continue to shrink in the April-June quarter but not nearly as much as it had been — perhaps at a rate of 2 to 2.5 percent.
The economy shrank at a 6.3 percent rate in the final three months of 2008, the worst showing in a quarter-century. Some economists say it fared about as poorly in the first three months of this year, while others expect a 4 to 5 percent rate of decline. The government releases its initial estimate for first-quarter economic activity at the end of April.
President Barack Obama is counting on the $787 billion stimulus of tax cuts and increased government spending to help bolster economic activity. The administration also has put forward plans to prop up troubled banks and to reduce home foreclosures.
The government is battling a three-headed monster: housing, credit and financial crises, which are the worst since the 1930s.
"The current crisis has been one of the most difficult financial and economic episodes in modern history," Bernanke said.
Even as the Fed chief mentioned improvements in some recent economic data, a government report released Tuesday showed the economy remains in a fragile state. Retail sales dipped 1.1 percent in March, a much weaker showing than analysts expected.
All the Fed's aggressive actions to fight the crisis also will help fend off any risk of a widespread and prolonged decline in prices, known as deflation. Bernanke didn't use the "d" word, but said that because of the weakness in economic conditions in the U.S. and worldwide, inflation has been low and will "remain quite low for some time."
Wholesale prices fell 1.2 percent in March as the cost of gasoline, other energy products and food plunged, the government reported Tuesday. Excluding volatile food and energy prices, the Producer Price Index was unchanged, below analysts' forecasts of a 0.1 percent rise.
Because the Fed's policies can help thwart a destabilizing drop in prices, they are "not at all inconsistent" with the central bank's goal of achieving stable prices over time, Bernanke said.
Some critics worry that the Fed's policies could spur inflation over the long run if key interest rates aren't quickly boosted and special lending programs aren't rapidly dismantled once the economy shows strong signs of turning around.
Bernanke acknowledged this will be a challenge and require a delicate balancing act. But he was optimistic the Fed is "well equipped to make those judgments appropriately."
Meanwhile, the government's bailout of giant insurer American International Group Inc., to the tune of more than $180 billion, underscores the urgent need for stronger regulations and new powers to minimize the damage from the collapse of a huge nonbank financial company, the Fed chief said.
"In my view, preventing the failure of AIG was the best of the very bad options available, but it nevertheless involved major costs, including financial risks to the taxpayer," Bernanke said.
The Federal Housing Administration used to be known as a place for low-income borrowers with tarnished credit histories. But now, it has become a destination for borrowers whose credentials are respectable, but not stellar.
To qualify for the best interest rates on a new or refinanced mortgage, you need to have a top-notch credit score and a substantial down payment or home equity. But if you have less than perfect credit and less than 20 percent in home equity, an important threshold, you’ll have to pay a lot more. And that’s why many of those borrowers are turning to the F.H.A.
The F.H.A. requires down payments of only 3.5 percent and has less stringent credit requirements than conventional mortgages backed by Fannie Mae and Freddie Mac, the two government-controlled mortgage finance companies. F.H.A. mortgages also have become one of the least expensive alternatives for new mortgages and refinancing, given the increase in fees tacked onto traditional loans.
“Just about anyone that is putting down less than 20 percent needs to consider F.H.A. financing,” said Joe Rogers, executive vice president of Wells Fargo Home Mortgage. “That doesn’t mean they need to take it, but they should consider it.”
The F.H.A., which was created during the Great Depression, does not make loans, but insures mortgages that meet its guidelines. Because the F.H.A. is the only viable option for a lot of people, its loans now account for a much larger percentage of all mortgages. In 2005 and 2006, at the height of the housing boom, only 1.8 percent of all mortgages were F.H.A.-backed, according to Inside Mortgage Finance. Last year, that number ballooned to 17.1 percent. The F.H.A. now insures 4.8 million single-family mortgages worth about $550 billion.
Historically, F.H.A. loans carried a certain stigma. They were viewed as hard-to-obtain loans for low-income consumers with checkered credit histories and small down payments. They also tended to be more expensive.
But in the current market, the opposite is often true. Qualifying for a regular mortgage has become more expensive, sometimes prohibitively so, given the many fees that are now layered onto conventional loans backed by Fannie Mae and Freddie Mac.
The fees are generally levied on borrowers deemed to be more risky. The charges depend on your credit score and the amount of money you’re borrowing relative to the value of your home. But they tend to hit people with credit scores under 700 and less than 20 percent in home equity. Carrying a home equity loan may result in extra fees, as will taking cash out of your home when you refinance.
The extra charges aren’t the only hurdle consumers may face. Borrowers with less than 20 percent in home equity must also purchase private mortgage insurance. The insurance has become much more difficult to qualify for and more expensive, especially in areas where home values have declined the most.
F.H.A. borrowers won’t avoid mortgage insurance, but they will escape the extra fees, lenders and mortgage brokers said. And that’s why, for many families, the F.H.A. program has become the most economical option.
If you’re having trouble securing a mortgage or refinancing an existing loan, here’s what you need to know about the F.H.A’s program:
ELIGIBILITY - Borrowers need to prove that they have sufficient income to meet their monthly mortgage payments.
Generally speaking, your payments, including taxes and insurance, should not exceed 31 percent of gross income. When you include car payments, student loans and other obligations, your total debt shouldn’t exceed more than 43 percent of gross income. But these thresholds are only guidelines. So if you have a larger than required down payment, or a good amount of money in the bank, you may be able to bend these rules.
The F.H.A. doesn’t impose any income limits or credit score minimums, but people with credit scores below 500 must have at least 10 percent of equity in their home to be eligible. (The average F.H.A. borrower has a score of 640.)
But to keep default rates down, many F.H.A.-approved lenders have recently started to impose their own credit score minimums — above and beyond the F.H.A’s. guidelines — and are requiring more stringent income documentation. Clearly, they’re trying to protect themselves: if a particular lender’s default rates exceed neighboring lenders, they can be audited and even removed from the program.
“In the last month and a half, there has been a dramatic increase in the minimum credit score required,” said Michael Moskowitz, president of Equity Now, a New York mortgage lender that makes F.H.A. loans. “Some went to 580 and others went to 620.”
COSTS Whether an F.H.A. loan will cost less depends on your personal situation. Currently, however, borrowers with credit scores less than 700 with less than 20 percent in home equity often come out ahead with F.H.A. loans. At the very least, lenders and brokers say it pays to compare the costs of an F.H.A.-insured loan versus a conventional mortgage if you fit into this category.
Generally, an F.H.A. loan’s total costs — including the interest rate and mortgage insurance — become less than a traditional mortgage’s costs as your credit score and home equity declines.
All borrowers must pay an upfront mortgage premium of 1.5 to 1.75 percent of the loan, which is usually tacked onto the loan amount. You must also pay an annual mortgage insurance premium of 0.50 of the loan amount (if you are borrowing 95 percent or less of your home’s value) or 0.55 percent (if your loan is more than that).
That premium is broken down into monthly payments. The monthly mortgage premium can be canceled once the mortgage amount falls to less than 78 percent of the home’s value, but it must be paid for at least five years — and it can only be eliminated by paying down your mortgage (not through appreciation in the value of your home).
Excluding the insurance premium, closing costs are about the same amount as you would pay with a traditional mortgage. All homes must be appraised — which costs about $400, on average — unless you’re refinancing an existing F.H.A. loan, said John Councilman, president of AMC Mortgage in Fallston, Md., and chairman of the National Association of Mortgage Brokers’ F.H.A. committee.
LOAN LIMITS - In many areas, loan amounts appear to hew closely to the conforming loan limits set by Fannie Mae and Freddie Mac. But F.H.A. limits are much lower in less expensive areas: in the lowest-cost areas, the F.H.A. will insure loans up to $271,050, though that number can rise to $729,750 in the costliest parts of, say, New York or California.
TYPES OF LOANS - The F.H.A. never trafficked in the exotic sub-prime loans that started the financial crisis. The vast majority of borrowers get a 30-year fixed-rate mortgage, though it also offers 15-year fixed rates and adjustable-rate mortgages.
FINDING A LENDER - Lenders need to be approved by the F.H.A. to participate in the program. You can find lenders or free counseling services through the Department of Housing and Urban Development’s Web site. You can search for mortgage brokers through the Upfront Mortgage Brokers Association, a trade group whose members state their fees in advance (though you’ll have to peruse the list for brokers that work with F.H.A. lenders).
ADDED BENEFITS - All F.H.A. loans can be assumed by a new borrower — as long as they qualify — which allows more flexibility if you plan on selling the home later. If mortgage rates were to rise, the new borrower is entitled to the existing interest rate.
Meanwhile, your down payment can be a gift from a family member. And co-borrowers don’t necessarily need to occupy the home. Moreover, the F.H.A. is more reluctant to foreclose on its borrowers. It has said that borrowers in default get to keep their homes about 65 percent of the time.
“They do not foreclose as quickly or without a thorough vetting of the situation,” Mr. Councilman said. “That’s very important in today’s market.”Tax season is upon us, and homeowners everywhere will reap the benefits of tax breaks and incentives. If you're currently renting, consider the tax advantages of homeownership. Now may be the time to buy. If you're an owner or seller, new incentives will help you survive this tough housing market. Know what expenses you can deduct and understand how new laws affect you. Remember to consult your tax advisor.
- Deduct the interest you pay on your home loan on your tax return. That means the mortgage interest deduction reduces your tax liability. And because your mortgage payments for the first few years are almost entirely comprised of interest, they are almost entirely tax deductible.
- Deduct property taxes and points you paid to lower your loan's interest rate. The IRS offsets the expense of your state/local property taxes by allowing you to deduct them from your itemized income tax return. And you get a tax benefit if you paid points to lower your mortgage interest rate.
- Take advantage of new laws in a challenging market. New homebuyers can get an $8,000 tax credit, short sellers won't be penalized for forgiven mortgage debt, and homeowners can contest their property taxes in a declining market.
- Request a property tax reassessment if your home's market value has declined. You don't need to pay for a special service to have your local tax assessor adjust your property taxes. If your property value is significantly lower now than when you bought it, show proof of your home's current market value and recent comparable sales in your neighborhood.
- Research past and proposed assessments that may apply to your home. Understanding property taxes and assessments will give you a truer picture of the cost of homeownership and help you predict and control your monthly expenses.
- Get a reliable estimate of your property tax bill. If you're buying a home, don't rely on the tax data in the property listing. Depending on the circumstances of the sale, your tax bill can differ from the previous owner's bill.
- Wrap your property taxes into your monthly mortgage payment. If paying one huge tax bill once or twice a year seems daunting, consider getting an escrow account. Also called an impound account, it protects the lender and offers convenience for the homeowner.
- Understand how capital gains tax is calculated. When you sell your home, you're taxed on any profit over $250,000 if you are single, $500,000 if married. But calculating your gains isn't as simple as "price you sold it for" minus "price you paid for it." The IRS takes into account the money you put into improving the home as well. So remember to save receipts for any repairs, maintenance and upgrades.
- Know how your tax situation changes with every real estate move you make. Whether you're buying a home, refinancing or renting out an investment property, understand how you'll be affected tax-wise.
- See if homeownership lowers your tax liability. Your tax situation varies depending on your stage in life. Examine your payroll withholdings and reduce them to account for the reduction in net tax liability. That means more money in your pocket every pay period.
The cities that are showing signs of stabilization and those that continue to unravel.
Wishing you'd left the game earlier is a time-honored Las Vegas tradition. Today, that's true not only for gamblers but for homeowners there. The last time Las Vegas properties were worth more than the average mortgage? August 2003.
Blame overbuilding and risky loans, a gambling mentality or even the desert sun, but based on Thursday's results from the S&P/Case-Shiller home price index, which measures metro home prices in 20 cities through December 2008, Las Vegas is the weakest market in the country. Prices are dropping quickly (down 4.81% since last month and 33% in the last year), the pace of decline is accelerating at the third-fastest rate in the nation, and based on lost equity, homeowners are out 65 months of mortgage payments.
All signals that things aren't likely getting better any time soon.
"Vegas is a market unto its own," says Steve Cesinger, chief financial officer at Dewberry Capital, an Atlanta-based real estate investment firm. "I don't know what those guys were drinking when they thought all this building made sense. If it does work out soon, then there's some force out there in the universe that I'm not aware of."
The S&P/Case-Shiller home price index, released monthly, examines repeat home sales in 20 metro markets, including the city core and surrounding suburbs. This means that while prices in tony San Francisco neighborhood Pacific Heights might be holding up, the net effect of including a bankrupt suburb like Vallejo brings down the metro area's score. Each city's score is assigned based on the price difference from 2000, which is scored as 100. So San Francisco's score of 130.12 means prices are up 30.12% from 2000. It still has the potential for a further fall, given the 31% year-over-year drop.
Forbes also analyzed monthly declines and year-over-year declines in home prices to determine where prices were falling fastest and where those drops were picking up momentum. It's not a good thing for San Diego that prices from November 2008 to December 2008 fell 2.13%, but as prices declined by 2.29% from October to November, and 2.44% from September to October, the speed with which prices are falling is slowing.
That slowing rate of decline, also seen in places such as Denver, Washington, D.C., and Boston, helped rank those cities as some of the stronger markets in the country.
Contrast that with Minneapolis, where prices fell just 0.96% from September to October, but by December, the rate of month-to-month declines had jumped to 4.6%, an unwelcome acceleration.
Next, to rule out places in complete depression, we looked at how many months of equity homeowners have lost. Places like Detroit (-2.98%) and Cleveland (-2.07%) haven't declined as quickly over the last month as Seattle (-3.63%) or Charlotte (-2.55%), but that's because prices in those two Rust Belt cities are so depressed it's difficult for them to fall any further. Detroit and Cleveland homeowners have lost 141 and 92 months of equity, respectively, whereas Seattle and Charlotte prices have only declined for the last 39 and 33 months, respectively.
One other factor to consider with the Case-Shiller numbers is that the index tracks repeat home sales. That means cities like Tampa and Miami, which are notorious for overbuilt new inventory and high numbers of foreclosures, perform better on the index than they ought to, as those two factors are not tracked.
"Case-Shiller doesn't take into account new construction or foreclosure sales," says Jonathan Miller, president of Miller Samuel, a Manhattan residential appraisal firm. "In some of these markets, I'm not sure how you can ignore new construction or foreclosures."
Another city with foreclosure and new construction problems is Phoenix, where bad loans have mounted and mortgage delinquencies, a forebearer of foreclosures, have risen.
"It's pretty gruesome," says Anthony Sanders, a finance professor at Arizona State University. He points to delinquencies as a major problem and a sign that the Valley of the Sun won't be bouncing back any time soon. In Phoenix, seriously delinquent loans--those that haven't been paid in 90 days--have increased from 3.5% to 27.3% for subprime loans since this time in 2005. Adjustable-rate mortgages that are seriously delinquent have gone from less than 1% to 20.2% in the same period.
With those problems looming on the horizon in many cities across the country, Obama might need more ammunition than his proposed $75 billion foreclosure prevention package offers.
Then again, even in a boom-bust capital like Los Angeles, if you bought in 2000, paid your mortgage on time and are still in your home, you've seen a 71.5% price appreciation. There's something to be said for that kind of responsible, long-term investor.
WASHINGTON — Senate Democrats on Monday advanced the $838 billion economic stimulus bill, clearing a major procedural hurdle by a razor thin margin with the help of just three Republicans. A vote on final passage of the bill is expected on Tuesday.
The Senate vote, by 61 to 36, to close debate on the stimulus, symbolized the partisanship that still grips Congress despite President Obama’s call for new cooperation. It also highlighted the rising power of the centrist Republicans who cast the critical votes. Under Senate rules, it takes 60 votes to invoke cloture and usher a bill to a vote.
Those votes, by Senators Susan Collins and Olympia J. Snowe of Maine and Arlen Specter of Pennsylvania, along with the 56 Democrats and two Independents who regularly vote with them, followed a succession of floor speeches by Republicans criticizing the stimulus as a bloated, wasteful spending bill.
But supporters of the measure said that a good, bipartisan effort had been made at drafting a compromise bill.
“I am proud of the bipartisan work that we have done during the last 10 days,” said Ms. Collins, who supplied one of the three crucial Republican votes. “As with any major legislation, this bill is not perfect, but it can go a long way toward creating jobs and addressing the dire economic crisis facing our nation.”
The majority leader, Senator Harry Reid of Nevada, said: “The United States senators from both parties met the seriousness of the economic crisis with an earnest approach to solving this emergency.”
With Mr. Obama in Indiana Monday afternoon to kick off a heightened effort to sell the stimulus plan to the public, Senate Democrats responded with their own speeches describing the bill as desperately needed to create millions of jobs and halt the recession. But for all the recriminations, it was unclear if Congress, in reconciling the Senate and House version of the bill this week, would take steps to ensure that it provides the quickest, most effective lift for the economy, or if lawmakers would simply take the path of least political resistance in rushing to get the bill to the White House by Monday.
Senate Republicans leveled their grievances amid an outcry by some House Democrats and governors and mayors from around the country, who accused Senate Democrats of caving to Republican demands by reducing the aid to states in the bill.
If the Senate approves the measure, as expected, negotiations to resolve differences with the $820 billion bill passed by the House are expected to focus in part on the Senate’s decision to cut $40 billion from a state stabilization fund.
That money, while not providing a direct lift to the economy, would reduce pressure on states for layoffs and service cuts that economists say would undercut the efforts by the stimulus bill to create jobs and spur consumer spending and business investments.
As it stands now, the Senate bill focuses more on tax cuts, while the House bill provides more aid to state and local governments. The Senate bill does not include $19 billion for school construction included in the House bill, reduces health insurance subsidies for the unemployed, and scales back Mr. Obama’s proposed middle class tax cut.
The Senate bill also includes nearly $70 billion to prevent millions of middle class families in 2009 from having to pay the alternative minimum tax, originally designed to impose minimum tax payments by the wealthy. Because Congress has made such an adjustment for years now, economists say the provision offers no new help to the economy.
Just as the Senate was voting, the Congressional Budget Office released a new analysis showing the total cost of the Senate version of the stimulus bill to be $838.2 billion over 10 years, of which $292.5 billion or roughly 35 percent is in the form of tax cuts.
The cost of the bill fluctuated slightly throughout the weekend, as Senate Democrats finalized the legislative language to reflect their deal late Friday night with the three Republicans.
After a week of the most open floor debate since Democrats won control of the Senate in 2006, the Republicans complained that they had still been largely shut out of developing the huge package of spending programs and tax cuts to revive the economy.
Senator Charles E. Grassley, Republican of Iowa, for instance, said that he and other Republicans had been prevented from offering amendments, including one that would place restrictions on an increased in federal aid to states for rising Medicaid costs.
“I’m not convinced the majority wanted to have open debate and take votes on many of these amendments including mine,” he said. “It’s too bad because this bill still can be made a bipartisan bill and this bill can still be made a more effective states.”
Senator James Inhofe, Republican of Oklahoma, complained that for all the spending in the bill, it does not provide a sufficient number of public works projects. ,
“If we’re going to spend all this money, let’s at least get something for it, provide some jobs and get some roads and highways and bridges, things this country really needs,” he said.
“This is the largest spending in the history of mankind, the largest spending in the history of the world,” Mr. Inhofe added. “It’s something that we should not let happen, but it is going to happen right down party line.”
The Republican leader, Senator Mitch McConnell of Kentucky, said he appreciated the more open floor debate but that it had not led to a bill that he could support. “Just because we get amendments doesn’t necessarily mean we will win them,” he said at a news conference.
“This package, had it been developed in genuine consultation, could have had a different result,” Mr. McConnell said. “But at the end of the day, it was — the administration decided — let the package be developed in Congress by the majority, and old habits die hard. You know, there was no meaningful consultation in the early part of the process. So if you don’t have that on the takeoff, you don’t end up having it on the landing.”
